Duke Energy Corp. (DUK), the largest U.S. utility owner, is seeking to sell its interest in 13 power plants in the nation’s Midwest after Ohio regulators denied its request to raise rates.

Citigroup Inc. and Morgan Stanley are advising Duke on the sale of stakes in the coal, oil and natural gas facilities in Ohio, Illinois and Pennsylvania that together have a capacity of 6,600 megawatts, Duke said in a statement today. The company will record a pretax charge of $1 billion to $2 billion in the first quarter from the sale, which it expects will take 12 to 18 months.

The sale of Duke’s Midwest commercial power interests may be worth $2 billion, according to Sanford C. Bernstein & Co. estimates and comes after the company failed to secure higher rates in Ohio amid plunging wholesale power prices. Duke began working with Citigroup last year on a possible sale of the Midwest plants, according to people familiar with the matter.

“We’ve been expecting this for some time,” Julien Dumoulin-Smith, a New York-based analyst for UBS AG, said today in a phone interview, noting utility investors are seeking stable returns. “We expect a lot of other publicly traded utilities will follow suit in the next 24 months.”

Ohio regulators on Feb. 13 denied Duke’s request to bill customers in the state an additional $729 million through May 31, 2015 to help cover a shortfall between power-plant costs and wholesale electricity prices. The rate request refusal “informed” the decision to sell the plants, Tom Williams, a company spokesman, said in an interview today.

Volatile Returns

“Our merchant power plants have delivered volatile returns in the challenging competitive market in the Midwest,” Lynn Good, chief executive officer of Duke, said in the statement. “The earnings profile is not a good strategic fit for Duke Energy.”

The average price of wholesale power in PJM interconnection LLC, the market for the plants Duke intends to sell, has fallen by nearly half since the 2008 recession due to lower industrial demand and a glut of cheap gas, based on the 2013 average compiled by Bloomberg.

“Sale of Ohio Genco assets would further strengthen Duke’s financial position,” Citigroup analysts led by Shahriar Pourreza wrote in a Feb. 13 note following the Ohio regulators’ decision. Duke could use sale proceeds to pay debt, acquire utility assets, or invest in solar and other renewable generation with predictable returns, the note said.

Duke said the sale would increase earnings per share, without specifying how it would use the proceeds. The 13 plants represent the bulk of Duke’s commercial power segment. Eleven of the facilities are located in Ohio, one is in Illinois and another is in Pennsylvania.

May Improve Earnings

Sale of the company’s holdings in the plants may help Duke improve its earnings if the proceeds are used to buy back shares, Hugh Wynne, a New York-based analyst for Sanford C. Bernstein & Co. wrote in a Feb. 14 note to clients.

Duke’s commercial power segment earned $27 million in the third quarter, down from $41 million in the second, according to data compiled by Bloomberg.

The utility supplies electricity to 7.2 million customers in North Carolina, South Carolina, Indiana, Ohio, Kentucky and Florida, according to its website.

Duke is scheduled to release fourth-quarter 2013 results at 7 a.m. New York time tomorrow.

Duke spokesman Blair Schroeder emphasizes that Duke’s position on the capacity case has been that “the outcome will help inform our decision, not determine our decision” on the plants.

“We are reviewing the order to determine impact on the company and our customers,” he says.

Open door

Analyst Hugh Wynne, who covers Duke for Sanford C. Bernstein & Co., calculates in a report issued Friday that the commercial division that operates the Midwest plants could be worth as much as $2 billion.

“Based on our conversations with management, we believe that the PUCO’s decision opens the door for Duke Energy to consider other strategic options for its Midwest generation fleet, including a potential divestiture,” he writes in the report.

He says selling the operations and buying back stock would be slightly accretive to shareholders. But he says if Duke cannot reach an attractive deal, holding on to the commercial operations would not hurt its value.

Charlotte-based Duke asked the Ohio commission in August 2012 to allow it to collect an estimated $728 million in capacity costs at an undetermined future date. Duke based its request on a July 2012 decision by the commission to allow American Electric Power to collect such costs.

The commission denied the request on several grounds. But at the heart of its argument was Duke’s Electric Security Plan, which the commission approved in 2011. The commission says that plan contained a provision for $110 million a year in charges to customers for capacity costs.

The commission says Duke could file to recover the money it proposes as a rate increase. Duke can also appeal the ruling.

Schroeder says no decision will be made on how to proceed until the company finishes digesting the 66-page order. He said the company may have a better idea about the impact of the order by early next week.

John Downey covers the energy industry and public companies for the Charlotte Business Journal.

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The Indiana Distributed Energy Alliance was incorporated with the Indiana Secretary of State on 3/15/2012 as a non-profit corporation. The Alliance intends to incorporate as a 501(c)(3) organization with the IRS. This reorganization is intended to allow for a broader coalition effort amongst businesses, individuals, elected officials, local units of government, colleges and universities, labor unions, economic development groups as well as environmental and consumer organizations to join together to promote renewable energy and distributed generation.